Germany’s beef with QE

Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble.
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Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble. Two quotes in particular from Schäuble stand out. Here’s the first:

“They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless.”

And here’s the second:

“[Our] successes are not the result of some sort of currency manipulation … The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily.”

Essentially what Schäuble is saying here is that we can’t hope to cure America’s deep-seated economic problems with monetary policy. The arguments over QE versus old-fashioned interest-rate cuts are beside the point: both of them try to boost the economy by lowering interest rates and increasing the supply of credit. But we’ve already gone far too far in that direction: America has too much debt, especially in housing. Adding to that pile of debt is only going to make matters worse, and the primary beneficiary is going to be our bloated and overgrown financial sector.

Germany, I think it’s fair to say, has never thought of its central bank as an institution which can or should provide a boost for the economy when times are hard. Yes, if a recession means lower inflation, then interest rates can and should fall, but the job of the central bank is just to make sure that inflation remains low: there’s no secondary mandate to maximize GDP growth or employment.

The result is an economy which has been built, over decades, on tight monetary policy and a strong Deutschmark (and now euro). Growth in such an economy doesn’t come from low interest rates causing a boom in credit and a weakening currency: it comes from creating goods and services which are higher quality than those found anywhere else in the world, and selling them at high prices.

The difference with the U.S. is stark. The Fed, of course, does have that explicit secondary mandate, and what’s more it’s clear from Ben Bernanke’s public statements that he considers himself forced into acting aggressively by the gridlock in Washington and Congress’s failure to provide the fiscal stimulus which is clearly warranted. On top of that, the U.S. is simply too big to carve out a niche as a provider of high-priced, high-quality, manufactured products: its greatest successes have been in the mass market.

Al of this is a recipe for fractiousness at the G20 meeting this week in Seoul. The unity we saw at the London summit in 2009 is a distant memory: no one, now, can even agree on what internationally coordinated action should look like, let alone actually get their respective parliaments to implement it. Which in turn means that G20 national economic policies are increasingly likely to work against each other than constructively with each other. It might well take another full-blown crisis before Germany and the U.S. are on the same page again.